The Day Ahead: Time to Rein it In

Well, the time has arrived. No, it's not the time to back up the Caterpillar (CAT) dump truck and buy Apple (AAPL) arm over shoulder. It's the point in earnings season when you should be feeling formless. In this context, this means wild emotional swings that often mirror the intensity and frequency of messages from tons of companies. If you're not undergoing attitude shifts, chances are you are not digging deep enough into 8-K filings, 10-Qs, earnings calls and the really fun statistics tables.

Here is a complete rundown of the shifts I've personally endured this week.

Compiling Stats to Eventually Go Contrarian

Everyone wants to be the person that called a 1.7% pullback, so why not stockpile statistics to be unleashed against the über-bulls?

First, average teen unemployment in the U.S. has been above 20% for four years. This makes me wonder about the quality of the next crop of Costco (COST) shoppers. Will we see the development of a permanent underclass that buys for need because they have no savings? This is especially relevant after this week's late-to-the-ballgame upgrade on the perpetually richly valued Costco.

Second, I do get why railroad stocks have outperformed the S&P 500 by 400 basis points in 2013. Union Pacific (UNP), Norfolk Southern (NSC) and others are throwing off strong price increases that other S&P stocks could only dream of achieving. However, volumes here have been kind of awful. Can robust pricing hold? Should an investor care about rail volumes as the market is touching new highs?

Third, I do find it peculiar that recent leading sectors -- among them basic materials, machinery and financials -- have cooled a bit this week. Are investors now grabbing at garbage, assuming that swelling inflows into stocks will lead to outsized gains for those fundamentally poor, usually high-beta names? This is a telltale sign that investors are foaming at the mouth.

Fourth: I'm seeing analysts employ a trick that I used to love doing: Upgrade a stock rating to Buy from Hold and lift the price target as the broader market is rallying, and the shares gain 25% inside of three months. You technically aren't wrong, since a Hold rating means people should hang on to already-enacted positions; the rating, meanwhile, is gibberish that says you expect in-line performance vs. a sector or equity benchmark. This is a crafty move -- one that's usually done near a market top. Trust me.

Finally, here are some thoughts on earnings.

Stanley Black & Decker (SWK): Pricing was down in two out of three business segments, and up 0.5% in the other, and gross margins didn't expand much. In all, you can add this name to the list of companies that are driving volume in non-emerging (slow) markets either via cheaper, lower-quality product lines or price cuts on core products. With the market at these levels, this business practice is a red flag for earnings sustainability.

W.W. Grainger (GWW): Sales growth went from 8% in November to 2% in December due to "paralyzing" fiscal-cliff impact. But, magically, the company has informed us that revenue has rebounded strongly this month -- with no specific range. I have no idea if January is a jumping point to brighter months or a simple post-cliff restocking, so there's reason to expect gloom in the rest of the first quarter.

In general I'm seeing a dearth of consistent messages this earnings season -- other than negativity in comments and numbers.

Starbucks (SBUX): I talked to the team prior to the quarter and viewed analyst day as a positive news peak, so I moved to the sidelines on Starbucks pre-earnings -- and I believe the shares could get cheaper, so I'd remain hesitant to get into the stock here. In any case, the market chose not to pump this high-multiple stock with vaunted "tailwinds" after earnings. That's pretty interesting, no?

I really think the markets are nearing a "take-a-breather" moment. Use the weekend to reevaluate every stock in your portfolio. Make sure it's not too overweight in any given sector -- and it probably is, given year-to-date gains. Also ensure valuations are still reasonable based on non-steroid-filled earnings projections. That is, don't justify holding on to winners based on higher estimates that came as the market has advanced.

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